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How Should Donors Respond to Resource Windfalls in Poor countries? From Aid to Insurance- Working Paper 372

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  • Anton Dobronogov, Alan Gelb, and Fernando Brant Saldanha

Abstract

Natural resources are being discovered in more countries, both rich and poor. Many of the new and aspiring resource exporters are low-income countries that are still receiving substantial levels of foreign aid. Resource discoveries open up enormous opportunities, but also expose producing countries to huge trade and fiscal shocks from volatile commodity markets if their exports are highly concentrated. A large literature on the “resource curse” shows that these are damaging unless countries manage to cushion the effects through countercyclical policy. It also shows that the countries least likely to do so successfully are those with weaker institutions, and these are most likely to remain as clients of the aid system. This paper considers the question of how donors should respond to their clients’ potential windfalls. It discusses several ways in which the focus and nature of foreign aid programs will need to change, including the level of financial assistance. The paper develops some ideas on how a donor like the International Development Association might structure its program of financial transfers to mitigate volatility. The paper outlines ways in which the International Development Association could use hedging instruments to vary disbursements while still working within a framework of country allocations that are not contingent on oil prices. Simulations suggest that the International Development Association could be structured to provide a larger degree of insurance if it is calibrated to hedge against large declines in resource prices. These suggestions are intended to complement other mechanisms, including self-insurance using Sovereign Wealth Funds (where possible) and the facilities of the International Monetary Fund.

Suggested Citation

  • Anton Dobronogov, Alan Gelb, and Fernando Brant Saldanha, 2014. "How Should Donors Respond to Resource Windfalls in Poor countries? From Aid to Insurance- Working Paper 372," Working Papers 372, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:372
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    File URL: http://www.cgdev.org/publication/how-should-donors-respond-resource-windfalls-poor-countries-aid-insurance-working-paper
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    Cited by:

    1. Dobronogov, Anton & Keutiben, Octave, 2014. "Containing volatility : windfall revenues for resource-rich low-income countries," Policy Research Working Paper Series 6956, The World Bank.

    More about this item

    Keywords

    countercyclical; foreign aid; hedging markets; low-income countries; macroeconomic stabilization; natural resources; volatility;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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